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The Haunting Truth About Low Interest Rates and the Housing Market

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Economics

The Haunting Truth About Low Interest Rates and the Housing Market


October 31, 2019
Haunted house on a hill
Image: Enrique Meseguer / Pixabay

The Federal Reserve slashed interest rates again to bolster the economy. Yet low interest rates do little good for someone who is denied a loan or can't afford a house in the first place. The housing market crash, rising student loans and economic divides still haunt the fragile uptick the housing market has seen the past few months. 

The Federal Reserve is hoping that its latest interest-rate cut will help keep the economy safely at cruising altitude. But don’t expect it to provide much of a lift to the housing market.

Housing is one of the pathways by which Fed policy produces results. When the central bank cuts interest rates, it encourages people to buy houses (since mortgages are cheaper) and builders to ramp up construction (since demand is strong and borrowing is easier). Those decisions then ripple through the economy, as people buy furniture, builders hire workers and brokers cash their commission checks.

But housing isn’t the engine it once was. The sector is a smaller part of the economy than before the financial crisis, and a smaller share of Americans are homeowners. And with rates already low, it isn’t clear that a further cut by the Fed will do much for housing — if it lowers mortgage rates at all. (More about that in a minute.)

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